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Value pricing

If you have a law firm — or any business for that matter — the 18-minute video below may very well change your life. It has mine. When I first watched it in early May, I was blown away. It had shown up in an Apple-related blog (because part of the video discusses Apple), so I tapped the link and watched it on my iPad. As soon as I finished watching it, I immediately went over to iBooks and found and downloaded the book, which I read over the next few days. Since then, I have spent countless hours trying to figure out my "why." (That's where I've been, if you're wondering.)

The video is from the acclaimed TED (Technology, Entertainment, Design) series of 18-minute talks, and the speaker is marketing consultant Simon Sinek. Since most of my reading covers business books and much of that are marketing books, I was surprised that I never heard of Sinek before. Turns out most people hadn't. But that will change.

Sinek's speech and book are called "Start With Why." His big idea is that successful leaders (actually, he prefers the term "those who lead"), whether in business or politics or any other walk of life, first talk about why they do what they do rather than about what they do or how they do it. His money quote, repeated mantralike throughout the 18 minutes, is "People don't buy what you do; they buy why you do it." To succeed, then, you need to start with your "why." Your purpose. Your central belief.

My why, and the why of this blog and my firm, is "to fix the practice of law through innovation." Knowing this why will make it easier to identify potential clients — namely, innovative companies who believe that dealing with lawyers doesn't have to suck. The how of our firm is what I've spent much of the time here talking about — namely, our firm's innovations in fixed pricing, plain English, and other areas. And the what, of course, is the actual legal service we sell.

Watch the video. As I said, it's just 18 minutes. Then, if it moves you as it moved me, start figuring out your why. Share what you come up with in the comments below.

Arthur C. Clarke famously said that "any sufficiently advanced technology technology is indistinguishable from magic." Does this adage — known as Clarke's Third Law — apply to pricing legal services?

Value pricing saves clients money, by eliminating the built-in waste that comes from billable hours. On the other hand, value pricing can easily make professionals more money, by allow for premium pricing, differential pricing, and charging extra for the certainty that fixed prices bring (think fixed-rate mortgages, which have higher rates than adjustable-rate mortgages).

Wait ... what's that? Clients pay less, but professionals make more? Sounds a lot like magic. Maybe you wouldn't consider value pricing to be a technology, but it certainly fits Clarke's definition of magic.

What do you think? Is it magic, or just sleight of hand? Please add your comment below.

In Objectified, Gary Hustwit's fine documentary on product design, famed Apple designer Jonathan Ive talks about the proper role of design: to do something useful, then get out of the way. Specifically, he's talking about the battery indicator on a MacBook Pro, and how it lights up only when needed.

What does this have to do with pricing legal services? Plenty. Here's Ive:

And if you think about it, so many of the products that we're surrounded by, they want you to be very aware of just how clever the solution was....

But at some level, I think you're aware of a calm and considered solution that therefore speaks about how you're going to use it, not the terrible struggles that we as designers and engineers had in trying to solve some of the problems.

Now substitute "lawyers" for "designers and engineers." When we bill by the hour, we focus on the time we spend doing the work, and on the work itself. Lawyers think that clients care about the time and the work, but they don't. They care about the results. They care about their problems getting solved. By obsessing (in our bills) on the hours we spent and the work we did, we are doing exactly what Ive is talking about. Instead of focusing on the solution, we are trying to get the clients "to be very aware of just how clever the solution was."

If instead you fix your prices, the focus shifts from the hours "to the calm and considered solution," as opposed to the "terrible struggles" (read "billable hours") we had trying to solve the problem.

Lawyers: Don't you want your clients to be impressed with how easy it was for you to solve their problems, rather than how how hard it was?

Do you agree? Disagree? Can lawyers learn from designers? Sound off in the comments.

Good article in Monday's Wall Street Journal about pricing strategy, something most lawyers never think about. The main premise is that most businesses shouldn't be competing on price — that is, by lowering prices. Instead, if you turn out a high-performance product or service, you should be able to charge a premium for that. The article is called, aptly, "Raise Your Prices!" and is written by Harvard Business School professors Frank Cespedes and Benson Shapiro and by consultant Elliot Ross. And despite my natural aversion to Harvard and to titles with exclamation points, it's a good article and one that all lawyers should read. Strangely, it is not (currently) hidden behind Rupert Murdoch's paywall, so you don't need a subscription to read it. (Maybe the Journal failed to take the article's advice.)

There's also an excellent sidebar piece, "Seven Mistakes of Poor Pricers," which briefly describes many of the same objections lawyers give me when I talk about Open Pricing. Read it, and see if any of it sounds familiar to you (such as "Cost-based pricing is easier to explain" and "Everyone else prices it that way").

Here's one of the money quotes (ignore my pun) from the main article on the benefits or pricing based on performance:

By competing on performance instead of price, you shift the battle to where your company's strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers' needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

But wait, you say. I thought all your talk about Open Pricing or fixed fees or value pricing was about saving the clients money? Why now all the talk about raising prices? My clients aren't going to tolerate that!

It's oversimplifying things to say that value pricing is about saving clients money. Instead, and much more importantly, it's about aligning your prices with the value the clients place on your services. Without that alignment, there is enormous waste and client frustration. Plus, the perverse incentives and unintended consequences of hourly billing artificially inflate client costs. So yes, you can raise prices for premium service and still save clients money.

Bottom line: clients will pay for value. If you're constantly discounting your fees, what does that say about the value you provide?

Private-practice lawyers: What do you think? Is there something you're so good at that you can command a premium? And in-house counsel: Are you willing to pay a premium for higher-quality service? Sound off in the comments.

The answer to that question can be found in the answer to another question: How should people pay for what you do?

If you are a laborer, then you get paid for the work that you do measured by the time that you spend doing that work. The more time you spend working, the more you get paid for those hours of work. Of course, you're competent, or you wouldn't have gotten the job. And you've been given some basic training on how to do it. But the actual quality of your work has no effect on how much you get paid. Moreover, everyone around you doing the same work gets paid at the same rate, so there's no incentive to do better.

If your trade is painting, then you are a house painter, working for one of those companies that hires college students in the summer and pays them by the hour for their labor. Maybe it's a really good company, and maybe you get paid at a high wage rate. You are a laborer, and you get paid for the hours that you labor at a uniform rate.

But if you're an artist, it matters not one whit how many hours you spend. You get paid for the work that you create, not the work that you do. Sticking with the painting theme, you could work all summer long — as much as your college-painter pals — on a single canvas, struggling to get it just so before you pronounce your piece finished. Or you could slap the paint on the canvas in a single frenzied afternoon, let it dry and run it over to the gallery. The art buyer doesn't care how long you spent on your masterpiece; she only cares if she likes it, and if it's valuable enough to her to spend the price that you set for it. She's not buying your time and materials; she's buying your creation.

Laborers get paid by the hour. Artists get paid by the result — by their creation.

Most lawyers seem to think that they're laborers, doing workmanlike work for their (often admittedly large) salaries, and having their employers charge for that work based solely on the hours spent laboring.

But I like to believe that as lawyers, we are knowledge workers. We are experts. We are professionals. Our clients are paying for our creativity, our inspiration, our innovation, our dash. If we are litigators, they want us to solve the problem that is the litigation. If we are family lawyers, they want us to find a way out of their deeply personal family dispute. If we are corporate lawyers, they want us to find a way to let them run their companies the way they want to. If we are trusts-and-estates lawyers, they want us to help them protect their legacies for their families.

Basically, if you want to save 20% on your outside-counsel spending, you can try to decrease your usage of outside counsel by 20%. But this usually means increasing your in-house-counsel work, which doesn't make your life any easier. Or instead of less outside counsel, you can use lesser outside counsel — discount shops who can't charge as much as the elite firms. But you usually get what you pay for.

Or you can save 20% (or even 30%) by going with a firm that uses open pricing. By basing their prices on the client's value on solving a problem and by setting those prices up front, open-price firms work more effectively without all the waste caused by hourly billing and its related systemic problems.

How much savings are we talking about here? Well, according to Hildebrandt's 2009 Law Department Survey of 231 companies, spending on outside counsel averaged 0.22% of total revenue. But that survey is heavily weighted toward Fortune 500 companies, where legal expenses are a much smaller percentage of revenue. A more realistic calculation for "normal"-sized companies is total legal expenses averages about 1.2% of revenue, and outside-counsel expenses make up 60% of that number.

How does that work out for your company? Figure it out for yourself. Embedded below is a minispreadsheet from the geniuses at InstaCalc. Just type in your company's revenue in the first cell. Feel free to abbreviate with m (million) or b (billion) or even k (thousand). You'll get an instant answer for the amount of savings — both 20% and 30% ("even better"). You'll quickly see that we're talking about real money.

Play around with it a bit, and see how much you can save with open pricing. Then call an open-pricing firm and start enjoying that savings. Having trouble finding one? Call me, and I'll help you find one.

• • •

A note on the title of this post: spend is a verb, not a noun. But current corporate jargon often involves nominalizing verbs, like using invite instead of invitation. ("Thanks for the invite.") We end up talking this way because it becomes kind of an insider's code. (See "Abandoning jargon 'at a high rate of speed'" over at Gruntled Employees.) Outside of corporatespeak, people would call it "spending." We should too.

So ironically, the best commercial I watched this evening — Super Bowl Sunday — wasn't even during the Super Bowl. Instead, it came during the new CBS show "Undercover Boss," which had the coveted post–Super Bowl slot. (So coveted because people tend to be too brain dead to turn off the TV after the game ends, as we were.)

The commercial features Dan, who owns a small barbershop. To his alarm, a large haircut chain moves in across the street, featuring six-dollar haircuts. Dan can't compete at that price. Instead, Dan goes to Office Depot, where he buys a sign:

WE FIX $6 HAIRCUTS

Soon, the large discount chain has gone out of business. All (presumably) because Dan was smart and didn't try to compete on price (and went to Office Depot to buy his sign).

You and I are Dan. We provide a quality service that people will pay for if they understand its value up front. If Dan tried to fight a price war against a huge chain, he would end up like all the little five-and-dime stores across the country that evaporated once Walmart got to town. Or the mom-and-pop hardware stores once Home Depot arrived. Or the little stationery stores once Office ... oops. (Awkward.)

Dan (yes, I know; Dan's not real. He's a character in a commercial. But work with me here. It's like a parable) knows that he can provide something that the discount chain can't. In this case, higher-quality haircuts. Instead of trying to fight a battle on his competitors' terms, Dan wisely changed the game and fought on his own terms. And he knew his customers would appreciate that value, and would pay for it.

Don't compete on other law firms' terms. Figure out what you can do differently from your competitors, and then buy a big (proverbial) sign. Be like Dan.

One of my big goals for 2010 was to adjust my role as a commentator on the state of the practice of law and become more of a change agent dedicated to helping fix it. Today I'm taking a first step in that direction by joining the faculty of the pioneering Solo Practice University. If you're not familiar with SPU you should head on over and check it out. Under the leadership of legal-education trailblazer Susan Cartier Liebel (who also blogs at the ABA Blawg 100 site Build A Solo Practice @ SPU), Solo Practice University picks up where law school left off. One of the most common complaints about legal education is its weakness in providing practical education about how to actually be a lawyer. SPU's got it covered.

What really convinced me to join the faculty was ... well ... the faculty itself. Check them out here. This is a phenomenal collection of big thinkers in the world of legal practice. Students (both active practitioners and current law-school students) have access to these big minds and can start learning how to improve their own practices right away.

I'm teaching a course called "Fixing Your Fees, Fixing Your Practice." In it, I'll be doling out practical advice on how to abandon the billable hour and replace it with open prices. If this change is going to happen, it's going to happen first with the solo and small-firm lawyers. And in my new role as an SPU faculty member, I'm going to help make that happen. So check out all the things you can be learning. Then enroll and start getting the real-world secrets about running your practice that you never got in law school.

Here's a short video (2:38) on the real reasons I've joined this great faculty:

In gathering the best and the brightest from the blawgosphere for this first full week of the 2010s, I thought I'd look at them through the lens of a crystal ball. Many of us are wondering what this new decade will be like, especially in the world of the law. First, though, let's talk about what this decade will be called.

A decade with no name

Look, we just went through a decade that had no name, let alone a cool one. No Roaring Twenties, no Gay Nineties (the 1890s). Even the decades that lacked ready-made adjectives could easily summon up images and memories: the eighties (bad hair), the sixties (bad hair, but in a different way), the seventies (bad lapels), or the nineties (the 1990s; nothing but irony). And don't talk to me about calling it the "Aughts" — what are we, soccer fans now? No, we're stuck with calling them "the two thousands," which stinks because you can't tell if you're referring to the decade or the century. (Kind of like my problem with calling law blogs blawgs, because you can't tell the difference when you're saying blog or blawg aloud. But for today, "Blawg Review" it is.)

First prediction: this decade will be called the "twenty tens" (or the "tens," for short).

Not "teens," not "tweens," not "tennies," or anything silly like that. And for Pete's sake, quit with the "two thousand and ..." business. People, especially lawyers (who generally are people, though some would argue), tend to clutter their speech with extra words. Don't. This year is "twenty ten," not "two thousand and ten." Check out this website devoted to this cause: twentynot2000.com. Also see this discussion at Wikipedia, and this article at TechCrunch.

OK. Now that we've got that settled, what's the law going to look like in the tens?

Killable hours

Second prediction, and this one's a bit of a layup for me, and will come as a surprise to no one, given the source: The billable hour will die die die. If it survives in any form at all by the end of the tens, it will be at the kind of fringe firms that will cause you to sadly shake your head and maybe cross to the other side of the street.

But don't just take my word on it. Over the past year, the blawgosphere and oldstyle-media traffic on the topic has taken on the shape of a hockey-stick graph, without all those embarrassing Climategate emails and tree-ring proxies. For example, legal-marketing guru Larry Bodine's Law Marketing Blog covers Comcast's recent insistence that its lawyers stop billing them hourly; Ashby Jones at The Wall Street Journal Law Blog also has the story.

Even more novel, Matt Homann recommends that we let our clients set their own price. Matt, whose name is synonymous with innovation, writes at the [non]billable hour that if lawyers focus on value to their clients, rather than their costs (their time), their clients will reward them. Across the pond, Michael Scutt at Jobsworth asks "Is it all about price?" He answers his own question, writing that lawyers need to be salespeople and recognize and apply his "single sales principle": your client's compelling need plus your credible solution plus your perceived value equals a sale.

Speaking of value, Ed Kless of the visionary Verasage Institute deftly shows how price has nothing to do with cost. His post has a graph showing that HP black ink is far more expensive than bottled water, which is in turn far more expensive than crude oil.

Jason Mendelson's Musings discusses what the failed hourly billing system has wrought — namely, clients who demand ever-increasing discounts and clients who don't pay. These are just symptoms of the problem, of course. Another symptom is that the billable-hour system pays lawyers more if they do more work, rather than enough work. Ron Friedmann discusses "good enough" at Strategic Legal Technology. But let's not get too focused on counting and measuring and reporting hours and documents and other output. The Wall Street Journal this week wrote approvingly about firms' having electronic dashboards to monitor their hours. The article's behind a paywall, but we discussed it here — disapprovingly.

Lawyer wannabes

In Ron's post, he mentions a New York Times piece written by two states' chief justices (NH and CA) that calls for the "unbundling" of legal services — namely, more do-it-yourself work by would-be clients. Revolutionary legal-learning genius Susan Cartier Liebel covers this in more detail at her Build A Solo Practice @ SPU. It all comes down to what your clients need. Third prediction: this DIY lawyering will becoming a growing trend. Look at WebMD. Lawyers have to stop thinking of themselves as special, as members of a priestly caste.

As our clients dabble with being do-it-yourself lawyers, we need to become more entrepreneurial. Big-hearted and big-minded Tim Baran of uMCLE talks about this killer app of a personality trait. Over at Wired GC, John Wallbillich explains how law firms need to look at their business models right now, before it's too late.

Client says what?

You can tell from the title of this blog that it's supposed to be focused on clients. Similarly, Dan Hull's ecletic and passionate What About Clients? reminds us to always ask that question (except when it's called "What About Paris?"; I haven't figured that out). The current post (by Holden Oliver) admonishes lawyers to get over themselves and act like professionals ... focused on clients. Likewise, the always-inspiring Carolyn Elefant tells us at My Shingle to see our clients as our new partners, and she does it convincingly without irony or cliché.

Also sidestepping the dangers of an overused phrase, change agent and quixotic Toronto Blue Jays fan Jordan Furlong explains at Law 21 what it really means to be a "trusted advisor." Jordan makes the fourth prediction: that lawyers will be competing with other service providers for clients' dollars (even Canadian ones), and that our lawyerly sense of service and trustworthiness will be competitive advantages.

Over at Legal Ease Blog, Allison Shields warns lawyers to be specific, meaningful, and realistic in setting goals for the new year. Heather Milligan at Legal Watercooler advocates a daily resolution for marketing over a yearly one. And the musically clever Jared Correia over at Mass. LOMAP instructs lawyers to resolve to maintain client contact. It sounds so simple, and yet we all end up letting it slip.

Benched

This past year has been brutal on associates at firms big and small, with nearly 5,000 reported layoffs. Law Shucks has done an incredible job of basically becoming the National Bureau of Economic Research (in a good way) when it comes to law firms, who are usually stingy with their information. Fifth prediction: Law Shucks will become the new NALP (also in a good way). And here's what the incomparable Elie Mystal at Above the Law has to say about the old NALP:

I don’t know. Increasingly, I’m of the belief that the old system just needs to be blown up and a new one should be built from scratch. How can a firm make a realistic hiring decision nearly two years in advance based on one year of law school? How can a law student make an informed choice when firms straight-up lie to them?

Elie is a wise, funny man. And speaking of funny men and making realistic hiring decisions years in advance, how's NBC's 2004 decision to hire Conan O'Brien to host "The Tonight Show" in five years look now? Does the word "d'oh" mean anything to you? Here's some advice, for TV networks and law firms alike: hire people when you need them, not when you think you might need them in a few years.

All these layoffs have had many unforeseen consquences, such as diminishing participation in lawyers' sports leagues. The Am Law Daily reports that some basketball and softball leagues are down as much as 30 percent since last year. Sixth prediction: Participation in laid-off lawyers' leagues will continue to rise.

Don't say "pursuant to"

If we're looking into reinventing the legal business, we should spend some time rethinking how we write. Lawyers use words like carpenters use hammers and nails. Except that they tend to use too many nails, and the nails are often fancy, overpriced, weak, feckless, and pompous (OK, maybe I went too far with the nail metaphor at "pompous"). Mister Thorne at Set in Style explains how lawyers are authors, and like all authors, need editors. If you care about writing, you should be reading Mister Thorne. (I swear he's the only person I call "Mister.") Over at Feminist Law Professors, Ann Bartow offers some hysterical media examples of why every writer needs a good editor. ("I never thought to look in the sandwich.") Meanwhile, The Namby-Pamby, Attorney at Law, shows that even potty-mouthed plain English is better and more readable than legalese. It's an important lesson, motherf@*&!%.

Social (media) security

It used to be that lawyers just had to write briefs, memos, and letters. Then in the nineties (the ironic ones, not the gay ones), lawyers started writing emails. Now, social media has opened up a whole new world of words for lawyers. And pictures and videos too. But lawyers are conservative, wedded to tradition and bound by precedent. Turns out that lawyers have been a little slow in embracing Web 2.0. Award-winning blogger Robert Ambrogi notes at Legal Blog Watch that only 29 of the Am Law 100 firms have vaguely active Twitter accounts, and only nine of them tweet regularly. Seventh prediction: Law firms will be dragged kicking and screaming into Twitterville. Not being on Twitter in the tens will be like not being in Martindale-Hubbell in the nineties (ironic ones). And still being in Martindale in the tens will be like being booked as a guest on "The Jay Leno Show" ... at ten o'clock. (Actually, the new Martindale is really LinkedIn, where you absolutely have to be, with a complete profile and headshot. Do it now. I'll wait. Mine's here.)

Molly DiBianca at Delaware Employment Law Blog lists her three principles for being a good social-media citizen: community, conversation, and transparency. Similarly, pioneering Twitter interviewer Lance Godard of 22 Tweets says that social media is all about connecting, contributing, and community. Check out his slideshow on social media here.

The brilliant Michelle Golden at Golden Practices wants to make sure that we're not turning people off with negative postings and status updates. Stephen Seckler at Counsel to Counsel advises that social media has to be a part of a firm's marketing plan. He's right. But Twittering lawyer extraordinaire Adrian Dayton at Marketing Strategy and the Law warns that Twitter is not a game to see who can get the most followers; they have no cash value. If they did, Adrian would be one of the wealthiest lawyers on Twitter.

The blawgerati

Lawyers have been somewhat more social-media savvy when it comes to blawgs, as you can see from all these excellent links. Besides Blawg Review, there are many other sources for aggregated links. The Brits are trying their own new version of Blawg Review with UK Lawyers Blog of Blogs, with the first edition hosted by Michael Scuff (see above). The ABA has a good collection (by Joshua Poje) with the Practice Management Advisors blog roundup. Blogging in-house lawyer Colin Samuels has what he calls "A Round Tuit" at Infamy or Praise. A terrific link collector, Colin is also a "sherpa" for Blawg Review. Walter Olson at Overlawyered, the original law blogger (since 1999, which makes him the Homer — as in Odyssey, not Simpson — of law blogging), always has a great roundup of legal news that will often make you spit-take your coffee.

Lawyers can provide a great clearinghouse for information. Conveniently named Ernie the Attorney (what would his parents have called him if he had been destined to be a plumber?) has a terrific post telling us his favorite sources for information.

Of course, not all law blogs are created equal. Social-media-for-lawyers guru Kevin O'Keefe, who writes Real Lawyers Have Blogs, takes issue with the so-called blogs that West Publishing–owned FindLaw puts out. As Kevin shows, these are not real blogs posts, but rather search-engine-optimized ads for its lawyer-directory service posing as actual content. In an indirectly related story, knowledge-management expert Greg Lambert of 3 Geeks and a Law Blog reports on how West has laid off a third of its law-library-relations team. Eighth prediction: The traditional providers of legal information — now freely available on the Web — are headed the way of the billable hour: West, Lexis, Martindale-Hubbell, and others. Their time has passed. They could save themselves if they could get ahead of this wave, but like newspapers and video stores, they're showing no sign of doing so. Already, Google is starting to make free online legal research available. Rick Georges over at Futurelawyer argues that law-book publishers are in the same kind of danger from e-books. Bruce MacEwen, who writes the always-excellent Adam Smith, Esq., boldly predicts which industries will survive the digitalization of the tens before making his Cassandran warning for our little industry.

There's an app for that (of course)

Soon it won't be enough for lawyers and law firms to have a website, a blog, a Twitter presence, a LinkedIn listing, and maybe a Facebook fan page. You're also going to have your own iPhone app. Jeff Richardson at iPhone J.D. shows how a couple of firms are already doing it. At last week's Consumer Electronics Show, according to tech blog Cult of Mac, a panel said that businesses must have a mobile app or "they don't exist." As for the iPhone itself, Enrico Schaefer at The Greatest American Lawyer has just gotten his own, and is declaring the BlackBerry platform dead for lawyers.

Gerry Riskin at Amazing Firms, Amazing Practices wonders whether we'll soon be delivering our marketing materials on a slatelike device. The video, which is a prototype demonstration of a fake but awesome slate, is worth a look ... at least until two weeks from now, when Steve Jobs (as rumored) introduces the Apple slate. Ninth prediction: He will, and it will completely change the way we interact with media.

R-E-S-P-E- ... aw, you can spell it yourself

One final thought, and then a final prediction. There is a theme in many of these posts, and while it's not always explicit, it's found in the best advice of these wonderful blawgers. It's this: treat people with respect. Respect for a client that goes with giving them an agreed-upon price — not a rate — before the work is done. Respect for different types of clients and what their needs are. Respect for associates to whom you promised jobs. Respect for readers of your written words, who have limited time and attention to devote to what you have to say. Respect for members of the social-media community that we're increasingly becoming a part of. And respect for people who are adapting to the forces of change in the new decade.

My last link is to our sister blog, Gruntled Employees, which discusses an interview with an airline executive who understood about respect: "If you treat me with respect, I'll do more for you." Seems like a fair trade.

And our last prediction, giving us ten for the tens: The Red Sox will win the 2010 World Series. They might have gotten a little weaker offensively, but it's a cardinal law of baseball that pitching and defense win championships.

Enjoy all these posts. Shepherd out.

• • •

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.

That's it. I'm shutting it down. The party's over. After a year and three days, the Revolution is complete. Turns out, it was easier than I thought.

How do I know? Well, I read it in The Wall Street Journal. Tuesday's paper reported that large-firm lawyers had figured out how to deliver value to their clients. The secret? You'll never guess.

Web 2.0.

I know. Ironic, isn't it. Lawyers, who have been so reluctant to put down their buggy whips and typewriters and powdered wigs, have now connected to the Interwebs to help their clients get more value for their legal spend. (Brief aside: when did spend become a noun? Answer: it didn't.)

Nathan Koppel, who's one of the Journal's excellent legal-beat writers and whose work I've mentioned here before, penned the article. The title and subtitle say it all: "Using web tools to control legal bills: Big law firms turn to technology to provide clients with real-time expenses, automate tasks." (The link appears to get you to the article despite the usual WSJ subscription firewall.) (Update: Naah, it appears that Rupert has strengthened the pay wall. You apparently need a subscription.) The premise is that law firms are "turning to technology" to help their clients see how freakin' expensive they are. In real time. On the Interwebs. Two-dot-oh, baby! Woo!

Woo, indeed. Koppel describes how one huge firm has made their costs transparent:

Foley & Lardner LLP, a firm with 1,000 lawyers and offices throughout the U.S., has developed a Web-based system designed to provide its attorneys and clients with a real-time and comprehensive picture of legal costs.

From their desktops, lawyers at the firm enter and continuously track the amount of attorney time and costs that have been incurred on a particular matter. Foley clients have direct access to the data through a secure Web site, which also provides access to court filings and correspondence.

Now don't get me wrong. Foley's a fine firm with some world-class lawyers. And I respect that they, like some other firms, are trying. I don't mean to pick on them, but they're the star of the article. And I'm sorry to say that they're missing the point. Cue the boldface message:

Clients don't care one whit about attorney time and costs. They care about the value the services have to them.

Koppel goes on to describe how this system lets the lawyers or the clients "crunch data" to see if the firm is using the right mix of associates and partners. Two points here: computers may be, as they say here in Boston, wickit smaht, but they can't possibly tell anyone what the proper mix of associates and partners on a given matter at a given time is. And second: again, clients don't give a rolling donut about that, as long as the job gets done on time, done well, and for a price that's less than or equal to the value the client places on it.

The system also "pings" lawyers with automatic email alerts when a case reaches certain budget levels. Whoa. Paging George Jetson: your flying car is double-parked. Guys, I've been getting "automatic email alerts" from bookstores and coffeehouses for years. This isn't exactly groundbreaking.

Here's the money quote, showing how law firms just don't get it:

Recently the firm could see a certain lawyer was spending more time than had been projected to complete one aspect of a business transaction. Foley alerted the client, a global manufacturer, and asked the company whether it had anyone in-house who could do the work.

Instead, an agreement was reached to have a law student then clerking at Foley handle the task at a "very favorable billing rate," Mr. Kalyvas says.

ZOMFG! All right, where do I start? First: a lawyer was spending too much time. Uh, dudes. Lawyers at big firms don't qualify for bonuses unless they bill a certain number of hours, usually in the 1,800–2,000 range for a year. So you're giving lawyers a financial incentive to bill more hours, then having the Interwebs ping them when they're billing too many. Hmmmm.

Next: asking the client, "Uh, you guys got anyone who can do this?" Imagine if you went to a hospital and the doctor's Web 2.0 system pinged her saying it was costing too much and so she asked you, "Uh, can you just take care of this at home?" Uncool, guys, uncool.

Finally: "We'll hand it off to Billy the 2L. And we'll give you a good rate. He doesn't know anything, but he's feisty!" Uh, no.

This fancy system, like similar systems at other firms, doesn't do jack for the problem of making sure that clients get value. Having a computer tell you that a case is getting expensive doesn't give the client the power to do anything about it, other than moving their work elsewhere, doing it themselves, or putting their trust in Billy the 2L. Do you think for a minute that if a firm asked the client about these alternatives before they signed on that the client would say that that was fine? Not a chance.

Sorry, guys. This isn't change. This is bells and whistles. This is a coat of paint on a busted old horse buggy. Change is open prices, where the client can decide if the cost matches the value before agreeing to the assignment. Pinging emails and Billy the 2L are not solutions to the problem of high legal costs or surprised clients.

• • •

All right, never mind. Despite what the Journal says, the Client Revolution isn't over after all. See you next time.

So goes the saying. What it really means is that buying a big-name product is generally seen as a safe bet, a lower-risk purchase. A cautious move.

The same thing is said about hiring big law firms. No one ever got fired for hiring Cravath. Or Sullivan & Cromwell. Or here in Boston, Ropes & Gray.

The logic goes this way: If your big law firm wins your case, then everyone says, "Well, of course they did. They're Cravath." And if they lose the case, everyone says, "Well, that can happen to anyone. No one wins all their cases."

But if your company chooses a smaller, lesser-known, perhaps-less-expensive boutique, the conversation goes differently. If they win your case, everyone says, "Well, it was a risky move. It's a good thing they won." And if heaven forbid they lose your case, everyone says, "Who the hell is Boutique Law Firm? And why didn't you hire Cravath?"

So risk-averse buyers of legal services buy the big-name firm, despite its being more expensive. In fact, they buy the big-name firm because it's more expensive. They go through a silent casuistry that goes like this: "The firm must be good because they charge so much. People wouldn't pay that much if it wasn't."

The truth is, we all do this. We ascribe qualities to products and services based on price and name recognition. Asked to choose between two glasses of wine, those of us who aren't oenophiles will usually say that the more-expensive one is better if — and only if — we know the prices beforehand. We buy status-symbol products because we think they're better, when in fact we're really buying them because they're more expensive.

Confessional time: I wear a Breitling watch. It was an anniversary gift from my lovely wife, but I got to pick it out. It's supposed to be a high-performance chronometer (not just a mere watch). Actually, it says it's a chronometre, which is better because it's in French. (Of the Swiss variety, of course.) It certainly seems to work well. But the truth is, I really don't know if it keeps better time than a Casio. And I've haven't fallen off a boat with it and sunk to 500 meters, so I can't really test if the claim in tiny letters on the face is true.

But if you held a gun to my head, I'd say ... well, I'd first say, "Whoa, what the hell's with the gun to my head?" — but then I'd tell you that the real reason I wear the Breitling is because it is expensive. (And because my lovely wife bought it for me.) It is a bit of a status symbol. Because people who notice it and know a little bit about watches will recognize it, and maybe they'll think I'm successful and good at what I do. I wear it because of what it says about me. Is it a good watch? Sure it is. It must be. People wouldn't pay that much if it wasn't.

What expensive things have you bought because of what they say about you? Clothes? Cars? A MacBook Air? An iPhone? Organic lettuce? A venti latte? Single-malt scotch? Share your own confessions in the comments.

But back to law firms. You might hire an expensive law firm because they really are the best. Or you might hire them because it says you can afford an expensive law firm. Or because it says you made the cautious choice, even if it was more expensive.

If you hired a discount law firm, what would that say about you?

And if you hired a law firm that used open, upfront prices based on the value of the desired result, what would that say about you?

Besides ushering in a new decade, today — January 1, 2010 — marks the first anniversary of The Client Revolution. It's been quite a year, both for this blog and for the concept of a client revolution. First, the blog:

In its first year, The Client Revolution has had just over 30,000 pageviews. In addition, nearly six hundred readers subscribe to the blog either by email or RSS reader. The ABA Journal named it to its "Blawg 100" list of "the 100 best websites by lawyers, for lawyers." To our subscribers and readers, I offer my sincere thanks and appreciation.

As for the Client Revolution — the concept: the economic turmoil of 2009 has accelerated the drive for change in the legal industry. Law-firm clients are increasingly dissatisfied with the status quo of hourly billing, legalese, and the legacy systems of a guild mentality. More firms — even the whitest of white-shoe firms — are at least paying lip service to the need to modernize the law-firm business model, if not actually acting. The Wall Street Journal Law Blog declared 2010 to be "the year of the flat-fee arrangement." While we prefer the term "open prices" (as opposed to the hidden prices that hourly billing creates), we appreciate the sentiment.

The question I get most often from law-firm lawyers is "How do you set your prices?" Funnily enough, it's also the same question I get from law-firm clients. Both groups want to know more about open-price lawyering, but they don't know where to start. So today, my commitment to you is to make this blog more of a resource for you — outside counsel, inside counsel, and clients — to help you figure out how to value and price legal services. I'll need your help, though, through your comment and questions and tweets. Share with me your questions and your ideas, your concerns about hourly billing and your fears about open pricing. In turn, I'll devote this site to answering those questions and allaying those fears.

One final note: Yesterday marked the third anniversary of the last hour that my firm, Shepherd Law Group, billed. We haven't missed timesheets and hourly billing. Over the past three years, our clients have gotten the benefits of a modernized law-firm business model. Many have saved tens or even hundreds of thousands of dollars in legal costs as compared to hourly billing, with the same or better quality than they would get at a large law firm. (And that's not just me talking: the peer-review panel of Law and Politics magazine has cited each and every lawyer who has ever worked at Shepherd as a "Super Lawyer" or "Rising Star.") And ours is a litigation practice (defending employers), which the naysayers say can't be done on a fixed-fee basis. Think again.

Lawyers: if we can do it, so can you. Clients: if our clients can enjoy the benefits of open prices, so can you. Let's make 2010 the year the Client Revolution goes into full swing. Happy New Year, and thanks for reading.

If you celebrate Christmas, and you have kids, you probably spent a lot of time this morning opening toy packages. Which means you probably spent a lot of time cursing under your breath about the ridiculous antishoplifting devices in nearly every toy pack. ("Why does Daddy keep making those noises?" "Oh, he's just thanking Santa under his breath. Let's go into the other room.") From the impossible-to-cut plastic to the twisted and taped insulated wires, toymakers (and the retailers that sell their toys) are so focused on defeating shoplifters that they suck all the fun out of opening kids' presents.

Oh, sure, shoplifting is a problem, especially at the holiday and in a poor economy. But give me a break. The toy industry is more focused on the one or two percent of people who would try to steal a toy from a store, rather than on the 98 or 99 percent of people who actually pay for their goods. It's this much-larger group whose Christmas morning the toymakers are messing with. Rather than focusing on the happiness of their real customers, the toy people are worrying about the small minority who might steal from them.

Law firms are just like the toy companies. Their clients are clamoring for fixed prices, because they're tired of not knowing how much their legal work is going to cost beforehand. But the lawyers resist, worrying about setting the price too low. What if the other side drives up the costs? What if the client takes advantage of my fixed price? What if? What if?

Instead of worrying about the small minority of cases that might cause you to leave money on the table, lawyers should focus the happiness of the clients who want to know what their costs will be. There's much more money to be made from happy clients than there is to be lost from underpricing. Lawyers — and toymakers — should stop being afraid.

• • •

If you enjoy The Client Revolution, then please take thirty seconds to vote for it in the ABA Journal’s Blawg 100 contest. Voting ends December 28. Just click on the badge below. And thanks!

In Part One, we talked about how BigLaw was congratulating itself for slowing the growth of its annual billing-rate increases. The jumping-off point was the National Law Journal's 2009 Billing Survey, in which 190 of the top 250 firms participated. The main story, written by Karen Sloan, requires a subscription.

One of the messages in the Billing Survey is that the lousy economy has increased the role that alternative billing plays. (Readers know that I hate that term. See "An alternative to 'alternative billing.'") Sloan writes:

Increasingly, clients are asking firms to enter into alternative fee arrangements that take into account the overall costs of their legal matters.

She again quotes our good friend, the ACC's Susan Hackett:

Some [clients] might say, "I really don't care what your rates are — that's not my problem. This is what I'm willing to pay for the work ... you figure it out from there."

The survey asked the firms about their use of alternative-fee arrangements (it didn't use the hyphen — ack!). Fifty-seven percent (up from 50% last year) reported that these arrangements accounted for ten percent or more of their firms' revenue. I suppose this is progress, but I remain unmoved. Here's why:

First of all, what's with this magic threshold of ten percent? Ten percent is a trial balloon, not a commitment to change. What is more, an astounding 43% don't even reach that level. The article cites a recent American Lawyer survey of 587 general counsel, finding that 39% of them have increased their use of alternative-fee arrangements this year. That means that 61% of the GCs reported that their use of these arrangements stayed the same or decreased. A nice one-page PDF summary of the GC survey is here, and a Law.com summary article is here.

Second, and this is an even bigger reason, is that "alternative-fee arrangements" is a weaselly phrase that obscures more than it informs. The National Law Journal's 2009 Billing Survey, after allowing the firms to congratulate themselves about their restrained rate increases and their perestroika-esque (admittedly not a common word, but whatever) attitudes to "alternatives," probes a little deeper behind the numbers. In asking about alternative arrangements, the NLJ sought some qualification. For example, the survey reports that an incredible 95% of the revenue at Paul Hastings came from alternative billing — in the form of discounted or blended rates.

What the what? Newsflash, people: Discounted and blended rates are still hourly billing. They are not "alternatives" to the billable hour. They are just forms of discounts. (For more on discounted rates, see "Legal advice: 30% off! (Why discounts don't always save you money).") Turns out that the other 5% of revenue at Paul Hastings comes from real "alternatives," including fixed, contingency, and retrospective fees. (Retrospective fees have their own problems, which we'll deal with in a future post.)

Not to pick on Paul Hastings. Others had similar results. Ogletree Deakins: 91% discounted or blended. Husch Blackwell: 98% discounted or blended. Dykema Gossett: 84% discounted or blended. And on and on. And many of the "real" alternatives include hybrid fees — that is, a hybrid of fixed and hourly fees.

Look: I credit the sentiment that many lawyers are saying that the time for "alternative fees" is now. But when the American Lawyer GC survey reports that the law firms initiated these alternative arrangements only 3% of the time, I wonder just how deep these sentiments run. And when the "alternatives" turn out not to be alternatives, I wonder if a lot of this is just lip service.

That loud noise you hear is the sound of large law firms patting themselves on the back for jumping on the so-called alternative-fee bandwagon. The December 7 issue of the National Law Journal has extended coverage of its 2009 Billing Survey. The lead article pronounces in its headline: "Reality dawns on hourly rates: The recession forced firms to moderate or forego rate increases." (We can't forgo the opportunity to point out that forego means "to go before," while forgo means "to do without." Just sayin'.) The story, written by Karen Sloan, requires a subscription. (A shorter version with a less-congratulatory headline — "Firms' Billing Rates Inched Up During 2009, NLJ Survey Shows" — is available here.)

It took a global economic meltdown and a major upheaval of the legal industry, but law firms seemed to get the message that 2009 was not the year to substantially increase their billing rates.

Clients: hold off on your jigs just yet. Seventy-six percent of the large firms raised rates in 2009. And Sloan reports that a survey by The American Lawyer has 81% of the top 200 firms expecting to raise rates in 2010.

The NLJ article trumpets, in bright red figures, that the average billing rate at the 250 largest law firms rose only 2.5%, to an average hourly rate of $372. By comparison, rates increased 4.3% in 2008, and 7.7% the year before. But check out the numbers behind the numbers and do the math. That means that BigLaw rates have jumped 15.1% since the start of 2007. I should just shut this blog down, since we're all revolutionaries now.

Sloan writes, "Not everyone is convinced that simply reducing billing rate growth is the right strategy for law firms in this economic climate." Then she gets the money quote from my friend Susan Hackett, the visionary general counsel of the Association of Corporate Counsel and torchbearer of its Value Challenge:

I can tell you that whenever I talk to clients they actually laugh when they hear about firms raising rates in this environment.

Maybe the law firms can't hear that laughing over all that backslapping.

There is an active major-league pitcher with a career win-loss record of 59-68, and he is a mortal lock for the Hall of Fame. Now, if you're a real baseball fan, you immediately realized that I must be talking about a relief pitcher, and probably a closer. And you'd be right. Trevor Hoffman, the closer for the Milwaukee Brewers, has 591 saves to go with that seemingly unimpressive W-L record, more than anyone in major-league history.

You see, wins are a useless statistic for a relief pitcher. Whether a relief pitcher wins or loses the game often depends on what other players (on either team) do. In fact, it's possible for a relief pitcher to win a game without throwing a single pitch. (This has happened 15 times since 1957, according to the hardball geniuses at Baseball-Reference.com. The scenario involves throwing out a baserunner to end an inning, having your team take the lead immediately after, and then getting relieved by someone else.)

The win-loss record for starters is a more-useful statistic, but it is still seriously flawed. For example, on October 2, Adam Wainwright was denied a chance to be the Majors' only 20-game winner in 2009 when the St. Louis bullpen imploded. He pitched six strong innings, striking out eight and allowing just one run. Then the first two batters reached in the seventh. The playoffs were around the corner and Wainwright had already thrown 90 pitches. So manager Tony La Russa (a lawyer, by the way) replaced him with Kyle McClellan, who promptly allowed Wainwright's two runners to score and let in four more of his own. As a result, Wainwright finished with 19 wins, which probably cost him the National League Cy Young Award. It wasn't his fault that he didn't get that twentieth win, still considered a magic number.

What is unusual is that both Cy Young winners announced last week had even fewer wins than Wainwright. Kansas City's Zack Greinke won with just 16 wins, and Wainwright's teammate Tim Lincecum won with 15 wins, the lowest win total ever (for a starter in a nonstrike year). In Sunday's New York Times, Tyler Kepner discusses this novelty in a piece called "A New Generation of Statistics Redefines Baseball." (Actually, the article appears online with a different title: "Not Your Grandfather’s Stats: Baseball Redefined.") Kepner makes the point that the sportswriters who vote for the awards are becoming savvier about which statistics are better indicators of a player's performance. Win totals have long dominated the Cy Young voting, and Kepner and ESPN.com's Rob Neyer point out that Wainwright would have beaten Lincecum if the Cardinals bullpen had held on to get him his twentieth.

Kepner compares the 1990 seasons of Roger Clemens and Bob Welch. Clemens pitched substantially better according to the more-meaningful statistics: many more strikeouts, fewer walks, far fewer home runs, fewer baserunners per inning pitched, much lower OPS against (that's opponents' on-base percentage plus slugging percentage, for you nonseamheads). But Welch won 27 games, six more than Clemens, and thus won the American League Cy Young Award.

The point here is that if you're going to measure performance, measure the things that matter most. (Brace yourself for the segue to law firms.)

So how do law firms measure associates? By the number of hours they bill, of course. Oh, sure, they have evaluations, and 360-degree reviews (whatever that means), and other methods of assessing performance. But the one number that matters — the win totals for associates, if you will — is hours billed for the year. (If this were baseball, we'd call it "HB." Of course the Times would call it "H.B." with the periods, just like they write "E.R.A." and "R.B.I." That bugs me.) This metric is so important that many BigLaw firms have a threshold: if you don't bill 1,850 hours, no bonus for you.

[It's worth noting that unlike baseball teams, law firms usually don't pay their associates based on performance. At least at the larger firms, they pay their associates (in lockstep) based on years of service. Under that system, Alex Rodriguez (who debuted in 1994 — call him a 16th-year associate) should get less than Cliff Floyd (who debuted a year earlier). Of course, the Yankees paid A-Rod $33 million for 2009, while the Padres paid Floyd a mere $750,000.]

And what's the most important measurement for the firms themselves? Profits per partner. This is how they keep score, with the numbers voluntarily reported and shared with The American Lawyer. (Why law firms, which are all privately held, would share their profit numbers is beyond me.)

But how do these "win totals" — HB and PPP — measure real performance? In other words, the performance that the clients care about. I submit to you that like relief wins, they don't.

It's difficult to measure performance when you're talking about professional services. Lawyers aren't playing baseball. But it's not impossible. Value-pricing guru Ron Baker has an entire book devoted to key predictive indicators, or KPIs: Measure What Matters to Customers: Using Key Predictive Indicators. In it, Ron talks about the sort of KPIs that law firms could use, such as turnaround time (which is basically the opposite of billable hours, if you think about it), innovation sales (selling new services), customer loyalty (retention rates), share of customer wallet, and others. You could learn a lot about how to run your law firm better — buy it here.

Words matter. What we call something matters. The name we give something usually provides people with the first opportunity to form an opinion about that something, so it's important that the name fits.

I hate "alternative billing." (If someone quotes me on this, make sure they include the quotation marks.) It's a terrible term; one that does injustice to the concept. As I've said before, it has a seamy connotation to it, like "alternative lifestyle." It seems vaguely Berkeley or Brookline or (gasp) Vermont, which makes tradition-bound lawyers very uncomfortable. We need an alternative for "alternative."

And I don't like the "billing" part any better. First, it makes it seem like the issue is about invoice styles, which makes it more boring than the Tax Code or, say, professional soccer. ("Woo! Another one-nought blowout!") Second, it places the focus on the law firm and its adminstration, rather than on the client and the value it is getting.

The intellectual godfather and guru of this ill-named field, the Verasage Institute's Ron Baker, has long advocated "value pricing" as the preferred term. [Update: Ron points out in the comments that he prefers "fixed price" when talking to the customers themselves; "value pricing" is more of a behind-the-scenes term.] It's definitely an improvement, and it is far more descriptive and accurate. The main idea, of course, is that lawyers should price their services based on their value to the client. (Gee, it sounds so obvious when you say it like that.) But my quibble is that the word "value" has Walmart-y connotations. People often connect "value" with "discounted," and that's missing the point entirely.

I propose a different approach:

Open-price lawyering.

What we're talking about here is legal services where the price is known to the customer ahead of time, so that the customer can make an informed decision about the worth of those services to him or her before actually agreeing to buy them. In other words, the price is out in the open. There is a fair exchange between lawyer and client with the client having as much knowledge about the price as the lawyer.

And what's the opposite of open-price lawyering?

Hidden-price lawyering.

The price is hidden from the client (and, often, even from the lawyer). I'm not saying that in a judgmental sort of way, like the lawyer is intentionally hiding the price from the customer. Well, maybe I am. But even if it is unintentional, that's no excuse for doing it.

Clients of the world: which would you rather have — open-price lawyering or hidden-price lawyering? Sound off in the comments, or reply to me on Twitter at @jayshep.

For the first eight years of running ... Shepherd Law Group, Shepherd billed clients by the hour. But soon after starting the firm he began to research everything about the billable hour, including how long it had been in use and whether a fixed-pricing model could even work.

...

His next step was to analyze eight years worth of bills from his firm, to figure out what was driving costs. Did his clients feel like they got their money’s worth and did his firm feel like they got paid fairly? He had read that you can’t do litigation on a fixed-fee basis, and 80 percent of his firm’s work is litigation.

“Now, after doing it for three years, I’m here to tell you, you can do litigation on fixed fees. It all comes down to, what is the service ... worth to the client?”

If there's a money quote in the article, it's probably this one, talking about how lawyers see themselves as being something more than other businesspeople:

“We’re so resistant as a group to thinking of ourselves as a business. But we are a business. We’re not a priesthood. It’s not a guild.”

Read the entire piece here. (Note: the article continues onto a second page. The next-page link is tucked in after some sponsored links.)

Now, it's true: I've been known to criticize law firms and their business models on this page and elsewhere. But I'm also no kind of fan of cellphone companies. I've been an iPhone user since the day the phone dropped, and my biggest complaint has always been AT&T's coverage. Before that, I (like many iPhone users) had Verizon, which had better coverage but questionable customer service. Also, like most people, I can't stand being locked into a two-year contract for anything. I have a mortgage, an office lease, and a marriage: that's plenty of long-term commitment for me.

Cellphone pricing has caused many to scratch their heads, or even bang them on their desks. Saul Hansell's finely reported and written article in Sunday's New York Times goes a long way to making some sense out of them. Saul's piece is called "Is There a Method in Cellphone Madness?" and the answer, he finds, is yes.

If you want to understand how the cellphone companies come up with their pricing and how they make their profits, you should read the article. But my main interest is in law-firm pricing, and there was one section that jumped out at me.

As you know, lawyers are obsessed with how much their services cost. (See "Hourly billing: the end of the beginning.") They claim that their inability to figure out what a particular case or matter costs makes it impossible to offer fixed prices. This notwithstanding the fact that law firms' costs are generally fixed: associates' salaries, other payroll, leases, insurance, and so on. Just because a case takes more work does not mean that it costs more to the law firm.

But it turns out that cellphone carriers also have no idea what their services cost. Saul explains:

In many ways, however, the least important factor in setting prices is the actual cost of providing cellular service. Cellphone companies resemble airlines, that other industry whose oblique prices exasperate consumers. Think of a cellphone network as one giant airplane that costs tens of billions of dollars to build. The cellphone companies don’t really know how much it costs to handle a call to Aunt Suzy in Syracuse, any more than an airline can calculate a specific cost for Seat 12B.

“Service providers don’t have a good measure of their costs,” said Philip Marshall, an analyst for the Yankee Group. “They don’t have the ability to say if they are going to make money” on any particular plan.

Huh. I hear lawyers say this to me all the time: "If you don't track hours, you idiot [OK, that part is inferred], how do you know if you're making money on a particular case." I tell them I don't. [That's often when they say "idiot" in their out-loud voice.] But I don't need to know that. I only need to know if I'm making a profit on my law firm, not on a particular case or client. Profit equals revenue minus expenses, and there's no earthly way to determine the real expenses for a particular case or client. Even if you bill by the hour.

The phone guys don't seem to have a problem with this. Saul writes:

Put simply, all a phone company wants is to get as much money as possible each month from its customers. Then it hopes that this total is more than its costs.

That sums up the cellphone business, and every other business in the world. For some reason, though, lawyers have trouble understanding that.

This is the question I hear the most. (It isn't, sadly, "How did you get to be so flippin' handsome?" That's second.) Unsurprisingly, I get this question mostly from other lawyers, and sometimes from in-house counsel. They ask this question because my firm, Shepherd Law Group, hasn't billed a single hour since 2006. We work for employers lowering their workplace risk and charging fixed prices for our services. So lawyers are always asking this question.

The question is at the heart of lawyers' hesitation to break their addiction to hourly billing and make the leap to fixed pricing. It is the root of lawyers' fear that they will make a mistake in setting their prices.

As if. The funny thing is that lawyers don't seem to have any trouble setting their hourly rates. And just to be clear: rates are a form of pricing, albeit an unsophisticated, rudimentary one. Ask a lawyer (we'll call her "Monique," because that sounds French and sophisticated and I'm about to make fun of people who try to sound French and sophisticated) who's just hung out a shingle how she set her hourly rate:

Well, I used to charge $525 an hour when I was a seventh-year associate at my BigLaw firm. I figure people will expect me to charge less because my firm is so much smaller. On the other hand, my practice is very specialized, and I really own my niche. [It's pronounced "nitch," by the way; it does not rhyme with quiche; saying it that way does not make you sound French and sophisticated. But I digress … told you.] On the other other hand, my office is in the suburbs instead of downtown. So I'm charging $425 an hour."

Monique's (made-up) monologue accurately reflects the thought process — explicit or just intuitive — that most lawyers undertake to set their rates. Think about it. Layered beneath the I-was-a-big-firm-lawyer pomposity and the now-I'm-on-my-own-what-do-I-do? abject fear is some pretty sophisticated market analysis. The legal marketplace often does put a lower value on work done by a lesser-known firm. The legal marketplace usually does place a premium on the skills of a specialist. The legal marketplace does place some value on a law firm's location on Wall Street as opposed to Maple Street.

My point is: Monique did not come up to me and meekly ask how she should set her rates. (In part, on account of her being imaginary.) So why should it be so different when we're talking about real (that is, fixed) prices instead of rates?

The answer is: because lawyers seem to think that the price has something to do with the (perceived) cost of providing the service. Something to do with the hours spent on doing the work.

As if. (This is my new favorite sentence.) Look, genius: let me first dispel the notion that legal work that takes more time costs more. You pay your associates an annual salary, right? Very few firms pay their lawyers by the hour. So the firm's "costs" do not rise when a motion takes six hours to write instead of three. Yes, yes. I know. "It's the opportunity cost. The extra three hours means that lawyer can't be working on something else, and that adds up over time." Sorry — I'm not buying that. If you have more work than you have lawyers available to do it, then congratulations — and hire more lawyers.

But more importantly, as I have said before (see "Hourly billing: the end of the beginning"), your customers don't care about your costs. The price they will pay is less than or equal to the amount that they value your service at that time. Period. What Monique did in her rates analysis is estimate how her potential clients would value the suburban small-firm nichework she has to offer. She did not wonder how much providing that work would "cost."

So ask your question again:

"How do you set your prices?"

I'll tell you. (Just promise not to tell anyone else.)

I analyze the client.

I assess the importance of the situation.

I assess the urgency of the situation.

I pay attention to what my competitors charge.

I consider the relative values of the different possible outcomes.

I figure out how hard it would be for the client to get better service elsewhere.

I determine how important my firm's expertise is to the likelihood of a successful outcome (in other words, is this going to be easier because of our particular skills, or could any trained monkey use the Interwebs to find the answers?)

I consider what we've charged other clients in the past for similar work

I consider whether those charges were heavy or light in retrospect

I consider the likelihood of getting more work from this client

I assess how much work we've done for this client already

I wonder how important getting this particular job is to our firm (if it isn't, I might raise the price)

I decide whether to do a single price for the whole gig, or whether (and how) to break up the job into minigigs with separate prices

and then I say, "This is our price."

Simple, right? No, it's not. Price things too high and you don't get the work. Price things too low and you get work you don't want, or clients you don't want, or you just don't make enough money.

But it's not that hard. You don't hear car manufacturers and watchmakers and restaurateurs and baseball players and movie stars whinge about how hard it is to set a price. They set the price. If people buy at that price, great. Increase the price. If they don't, zut alors. (Oh, so sophisticated.) Lower the price and try again.